Exploring the Nexus between Export Controls and Indirect Expropriation

Description

This paper explores the grey area between international trade law and international investment regulation. Since the GATT/WTO system has always been import oriented, the focus of various WTO agreements such as Agreement on Safeguards, Agreement on Subsidies and Countervailing Duties and the Agreement on Antidumping is on controlling and regulating the import behaviour of WTO Members. Export controls received little to no attention during the phased construction of the GATT/WTO system. It was thought that export controls will be limited to restricted circumstances such as during famine and times of war or natural disasters. In the last decade or so, however, the inadequacies of the GATT/WTO system regarding export controls have increasingly emerged. For example, China’s export restrictions on Rare Earths and certain Raw Materials were the subject of two high profile WTO dispute settlement proceedings. In the past, US and European textiles interest groups approached their governments to counter India’s export controls on cotton because the restrictions were affecting their members’ business/manufacturing operations. Similarly, Pakistan took extensive efforts to prevent export of cotton yarn in 2009-2010 after the local apparel industries complained about lack of availability of cotton yarn domestically. Quite recently, the Australian Government threatened to impose export quotas in order to convince large gas companies to divert part of their output for domestic use in order to reduce domestic gas prices. If the government of the host state restricts the ability of the petroleum and gas companies to export their output that essentially means that the governmental action is undercutting the profit margins of the investor. This may amount to the government of the host country indirectly expropriating the investment by the foreign investor. Off course, the question of whether indirect expropriation has occurred or not depends on the underlying FTA/BIT which may have led to the initial investment by the prospecting/mining companies. With this context, the paper explores the larger theme on export controls and their effects on foreign investment. The debate cannot be limited to natural resources and commodities only. As the global population grows, other sectors can be affected by the application of export controls e.g. agricultural products, food and livestock. This paper briefly explores the mechanics of export controls in light of the WTO rules and jurisprudence. The paper particularly looks at GATT Article XX (j) which refers to the powers of the WTO Member to adopt measures in order to secure or distribute products that are in short supply nationally or locally. The treatment of the GATT Article XX (j) by the Appellate Body in the India – Solar Cells case provides us with useful insights of how WTO treats export controls. The paper uses this as the basis to explore the nexus between investment and export controls. The premise behind this discussion is the scenario where foreign investors particularly invest in a country with a view to exporting the output of their operations. Taken on a very basic plane, foreign investment based on this model presumes that the function of the investment is to generate profits through the process of export. Therefore, any restriction by the host state on this process undercuts the profitability of the venturers and hence may amount to indirect expropriation